Targeting renminbi, Bernanke on the wrong warpath

Commentary: It’s the euro that needs to be revalued

LONDON (MarketWatch) — Ben Bernanke is on the warpath. But it’s the wrong one. Last week he lectured the Chinese for their renminbi obduracy, claiming they were blocking worldwide recovery by refusing to allow their currency to revalue. The Chinese are easy targets. More difficult, but more worthwhile, would be to focus attention on what appears to be a far more important issue: the under-valuation of the euro.

By going after the renminbi, Bernanke is maybe trying to boost his approval rating from U.S. lawmakers. Texas Gov. Rick Perry has promised fire and brimstone should the Fed chairman tread further along the quantitative easing route. But Bernanke has got the wrong adversary in his sights. On world markets the prize for the biggest under-valuation goes not to the renminbi, but to the two foremost reserve currencies, the dollar and der euro.

If Bernanke wished to go down in history as bringing about a currency realignment beneficial to the world economy, he’d push for a euro revaluation. This could only take place if one or several weaker components, starting with the Greeks, split off from the rest — providing the opportunity for other euro countries, led by the Germans, to forge a stronger, niftier, more durable and more compact monetary union.

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No easy job to quantify the degree of over- or under-valuation. The People’s Bank of China’s amassing of dollars certainly suggests manipulation. But there’s a certain hypocrisy about American currency invective. China’s purchases of greenbacks and subsequent investment in U.S. Treasury bills are the strongest single reason for the persistence of American world currency supremacy and the “exorbitant privilege” of being able to spray around the world vast issuance of low-cost dollar securities.

Could it be that the Chinese currency is in fact starting to become over-valued? China has inflation of 6% compared with America’s 2%. Since the renminbi is appreciating by 3% to 4% a year, China is losing competitiveness against the U.S. to the tune of at least 8% a year. According to a study from the Boston Consulting Group — quoted in last Friday’s Financial Times — rising Chinese labor costs and improving US productivity could cut sharply America’s trade deficit with Beijing over the rest of the decade.

If you’re searching for exchange-rate distortions, look no further than at the European single currency. Figures from the Bank for International Settlements indicate that, since monetary union started at the end of 1998, the Chinese currency has revalued by 10% in real terms against the rest of the world. The euro registered a real devaluation of 4%, the dollar a massive 18%.

Discrepancies within the European monetary union — although diminishing somewhat during the past two years of crisis — have been still larger. According to the BIS data, the real value of the “German euro“ has fallen 10% since December 1998, while that of the “Greek euro” has risen 6%. This has produced a corresponding competitiveness gap that can no longer be honed away through “internal devaluations“ — changes in relative costs and prices in Greece — but will have to be eradicated, sooner or later, by Greece leaving the euro.

Germany and the other creditor nations of Europe would probably be better off with a 10% euro revaluation that would counter inflation via lower import prices, improve German consumer spending power through the terms of trade impact and raise productivity by promoting more efficient use of domestic industrial capital.

Much political theater in Washington centers on the renminbi, but the euro is really center stage. Splitting up the euro area into creditor and debtor countries, and allowing the new German-led creditor euro to revalue, would add up to a healthy exchange-rate realignment. Rather than focusing on yesterday’s target of the China’s alleged manipulation, American policy makers should be thinking about today’s big problem: the euro. We can only hope that Bernanke is giving some thought to the issue.

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